Half-way from rags to richesApr 24th 2008From The Economist print editionVietnam has made a remarkable recovery from war and penury， says Peter Collins (interviewed here) But can it change enough to join the rich world?EyevineCorrection to this articleKNEES and knuckles scraping the ground， the visitors struggle to keep up with the tour guide who is briskly leading the way through the labyrinth of claustrophobic burrows dug into the hard The legendary Cu Chi tunnels， from which the Viet Cong launched waves of surprise attacks on the Americans during the Vietnam war， are now a popular tourist attraction (pictured above) Visitors from all over the world arrive daily at the site near the city that used to be called Saigon， renamed Ho Chi Minh City after the Communists took the south in Alongside the wreckage of an abandoned M41 tank another friendly guide demonstrates a dozen types of improvised booby-traps with sharp spikes that were set in and around the tunnels to maim pursuing American The Vietnamese not only welcome the tourist dollars Cu Chi brings in， but are also rather proud of They feel it demonstrates their ingenuity， adaptability， perseverance and， above all， their determination to resist much stronger foreign invaders， as the country has done many times down the These days Vietnam also has plenty of other things to be proud In the 1980s Ho Chi Minh's successors as party leaders damaged the war-ravaged economy even more by attempting to introduce real communism， collectivising land ownership and repressing private This caused the country to slide to the brink of The collapse soon afterwards of its cold-war sponsor， the Soviet Union， added to the country's deep isolation and cut off the flow of roubles that had kept its economy Neighbouring countries were inundated with desperate Vietnamese “boat people” Since then the country has been transformed by almost two decades of rapid but equitable growth， in which Vietnam has flung open its doors to the outside world and liberalised its Over the past decade annual growth has averaged 5% Young， prosperous and confident Vietnamese throng downtown Ho Chi Minh City's smart Dong Khoi street with its designer The quality of life is high for a country that until recently was so poor， and its larger cities have retained some of their colonial charm， though choking traffic and constant construction work are beginning to take their An agricultural miracle has turned a country of 85m once barely able to feed itself into one of the world's main providers of farm Vietnam has also become a big exporter of clothes， shoes and furniture， soon to be joined by microchips when Intel opens its $1 billion factory outside Ho Chi Minh C Imports of machinery are Exports plus imports equal 160% of GDP， making the economy one of the world's most All this has kept government revenues buoyant despite cuts in import The recent introduction of company taxes is also helping to fill the government's Spending on public services has surged， yet public debt， at an acceptable 43% of GDP， has remained fairly Having made peace with its former foes， Vietnam hosted Presidents Bush， Putin and Hu at the Asia-Pacific summit in 2006 and joined the World Trade Organisation in This year it has one of the rotating seats on the UN Security C Vietnam's Communists conceded economic defeat 22 years ago， in the depths of a crisis， and brought in market-based reforms called doi moi (renewal)， similar to those Deng Xiaoping had introduced in China a few years As in China， it took time for the effects to show up， but over the past few years economic liberalisation has been fostering rapid， poverty-reducing The World Bank's representative in Vietnam， Ajay Chhibber， calls Vietnam a “poster child” of the benefits of market-oriented Not only does it comply with the catechism of the “Washington Consensus”—free enterprise， free trade， sensible state finances and so on—but it also ticks all the boxes for the Millennium Development Goals， the UN's anti-poverty The proportion of households with electricity has doubled since the early 1990s， to 94% Almost all children now attend primary school and benefit from at least basic Vietnam no longer really needs the multilateral organisations' Multilateral and bilateral donors together have promised the country $4 billion in loans and grants this year， but with so much foreign investment pouring in， Vietnam's currency reserves increased by almost double that figure last At least the aid donors have learned from the mid-1990s， when excessive praise discouraged Vietnam from continuing to reform， prompting an exodus of Now the tone in private meetings with officials is much franker， says a diplomat who attends Vietnam has become the darling of foreign investors and Firms that draw up a “China-plus-one” strategy for new factories in case things go awry in China itself often make Vietnam the plus- Wage costs remain well below those in southern China and productivity is growing faster， albeit from a lower When the UN Conference on Trade and Development asked multinationals where they planned to invest this year and next， Vietnam， at number six， was the only South-East Asian country in the top The government's programme of selling stakes in publicly owned firms and exposing them to market discipline has recently gathered At the same time the switch from a command economy to free competition has allowed the Vietnamese people's entrepreneurialism to Almost every household now seems to be running a micro-business on the side， and a slew of ambitious larger firms is coming to the Much of the praise now being showered anew on the country is The government is well on course for its target of turning Vietnam into a middle-income country by Its longer-term aim， of becoming a modern industrial nation by 2020， does not seem But from now on the going may get As Mr Chhibber notes， few countries escape the “middle-income trap” as they become They tend to lose their reformist zeal and see their growth A study in 2006 by the Vietnamese Academy of Social Sciences concluded that further reductions in poverty will require higher growth rates than in the past because the remaining poor are well below the poverty line， whereas many of those who recently crossed it did not have far to The stench of corruptionThe Communist Party leadership openly admits that the Vietnamese public is fed up with the endemic corruption at all levels of public life， from lowly traffic policemen and clerks to the most senior people in In 2006， just before the party's five-yearly congress， the transport minister resigned and several officials were arrested over a scandal in which millions of dollars of foreign aid were gambled on the outcome of football The leadership insists it is doing its best to clean up， but a lot remains to be Almost as bad as the corruption is the glacial speed of legislative and bureaucratic Proposed laws have to pass through all sorts of hoops before taking effect， with endless rounds of consultations to build The dividing line between the Communist Party， the government and the courts is not always The justice system is Lawyers have no formal access to past case files， so they find it hard to use precedent in legal The government is part-way through a huge project to slim the bureaucracy and streamline official It recently cut the number of ministries from 28 to Yet for the moment the bureaucratic logjam is stopping the country building the roads， power stations and other public works it needs to maintain its growth Nguyen Tan Dung， the prime minister， says that if growth is to continue at its current rate， the country's electricity-generating capacity needs to double by That seems a tall order， to put it Soaring car-ownership is leaving the country's underdeveloped roads increasingly In an admirably liberal attempt to limit price distortions as oil surged above $100 a barrel， the government slashed fuel subsidies in F But one effect will be to stoke inflation， already worryingly high at 4% in M Bank lending surged by 38% last year as firms and individuals borrowed to speculate on shares and The government is finding it much harder to manage an economy made up of myriad private companies， banks and investors than to issue instructions to a limited number of state institutions， especially as the public sector is currently suffering a drain of talent to private firms that are able to offer much higher What could go wrongAll this leaves Vietnam's continued economic development exposed to a number of risks: • Rising inflation—which is hurting low earners in particular—and a growing shortage of affordable housing could create a new urban underclass among unskilled workers who have left the land for the Combined with rising resentment at official corruption and the increasing visibility of Vietnam's new rich， this could cause social friction and bring strikes and protests， chipping away at the political stability that has underpinned Vietnam's strong growth and • Trade liberalisation and increased domestic competition will benefit some firms and farmers but hurt others—especially inefficient state These could join forces and press the government to halt or even reverse the • The slumping stockmarket or perhaps a property crash could cause a big firm or bank to Given the country's weak and untested bankruptcy laws and financial regulators， the authorities may find it hard to deal with that kind of • Natural disasters， from bird flu to floods， could cause • The economy could come up against the limits of its creaking infrastructure and the shortage of people with higher Jammed roads， power blackouts and the inability to fill managerial and professional jobs could all bring Vietnam's growth rate crashing Vietnam has set itself such demanding standards that even if some combination of these factors did no more than push annual growth below 5%， it would be seen as a serious The foreign minister， Pham Gia Khiem， notes that Vietnam's current growth of around 8-9% is lower than that in Asia's richest economies at the same stage in their Despite the risks ahead， Vietnam has already provided the world with an admirable model for overcoming war， division， penury and isolation and growing strongly but equitably to reach middle-income This model could be followed by many impoverished African states or， closer to home， perhaps by North K If it can be combined with gradual political liberalisation， it might even offer something for China to think
